Itochu - Company History

An Omi merchant’s trade, begun peddling linen

In 1858 Ito Chubei I (初代伊藤忠兵衛), then fifteen, set out from Goshu — Omi Province — to sell linen cloth wholesale across western Japan as a mochikudari peddler[1]. It was the year the country opened and foreign trade began[2]. Mochikudari, carrying the goods on one’s own back and walking from province to province, was the trading method of the Omi merchants, and by it Chubei extended his ground into the Chugoku region and Kyushu during the upheaval at the end of the Tokugawa period[3]. The Koto district on the eastern shore of Lake Biwa is held to be the birthplace of the Omi merchants[4], and the custom of leaving home young to trade in other provinces was rooted in the area.

In January 1872 Chubei opened a wholesale house in kimono fabrics and cotton and hemp cloth — 呉服太物 — at 3-chome, Hommachi, Higashi-ku, Osaka, under the shop name Benichu[5]. It was a move from peddling to a fixed shop, made because he saw the future of Osaka as the commercial capital after the Restoration[6], and the shop grew on the wave of Meiji westernisation[7]. Nor did it stop at domestic wholesaling of cloth: in 1886 it began importing rasha woollen cloth directly, and in 1888 it began exporting textile sundries directly to the United States[8].

The switch to cotton yarn, and a continental market widened by two wars

In 1893 Chubei opened Ito Itoten at 2-chome, Azuchimachi, Higashi-ku, Osaka, and moved into cotton yarn[9]. It was a switch made because he saw the promise of modern spun cotton yarn, and this shop became the foundation stone of what would later be Itochu Corporation[10]. The trade in cotton yarn and cotton cloth that it began is held to have been the first of its kind in Japan[11]. As the Sino-Japanese and Russo-Japanese wars widened the market on the Asian mainland, the export business grew in earnest[12].

From peddling linen to kimono cloth, to direct import and export, to cotton yarn — the business changed four times in some forty years[13]. The first switch was prompted by the narrowing of the peddler’s middle margin as transport networks were built out[14]. After the move into cotton yarn, sales to the cluster of spinning companies around Osaka became the base[15], and the shape of a trading house built on textiles was set.

Incorporation as a partnership, and caution amid the wartime boom

In December 1914, to hold the various Ito family businesses together, Itochu Gomei Kaisha was established with capital of ¥2 million, and Ito Chubei II (二代目伊藤忠兵衛) became its president[16]. The boom brought by the First World War expanded the business greatly, in trade and at home alike[17]. In December 1918 Itochu Gomei divided its trading operations in two, establishing Itochu Shoji Co., Ltd. with capital of ¥10 million and Itochu Shoten Co., Ltd.[18] The latter would become Marubeni Shoten[19], and from this split Itochu and Marubeni walked separate roads.

1919 was a boom year, called the greatest since Emperor Jimmu; bank deposits swelled into the tens of millions of yen before one’s eyes[20]. At the end of the year Chubei II talked it over with Ito Takenosuke (伊藤竹之助), newly back from a tour of the West, and settled the policy: with money coming in like this a reaction is certain, so let us do no speculating whatever and simply save[21]. From then on the house refused all forward speculation and accumulated funds, holding to a strictly conservative line[22].

Ruin in the 1920 panic, and a board rebuilt at an average age of 35

In the spring of 1920 the market began to give way before the cherry blossom, and then collapsed outright[23]. Every contract on the books was broken, and the quantities cancelled amounted to some twenty months’ business to the end of 1921[24]. The spinning companies agreed to a discount of about 20 per cent, but customers and fellow merchants required 60[25]. By the new year all deposits and share certificates had vanished, and only an enormous debt remained[26].

Rebuilding was helped by the spinning companies, which bought the property and the impaired shares held as collateral from the banks at market price, valued them at several times that, and applied them against the debt[27]. At this point Itochu parted with about half of its loyal staff[28]. Chubei II replaced every director, rejuvenating the board to an average age of thirty-five — built around his own thirty-four years and the thirty-seven of managing director Ito Takenosuke, with senior executive director Nakamura Shintaro (中村信太郎) at thirty-eight the oldest[29]. The pattern was set here: withdraw at the peak of the boom and prepare; at the bottom of the panic, rejuvenate and turn to prudence[30].

From taking over Toyama Spinning to founding Kureha Spinning

Toyama Spinning, the parent body of Kureha Spinning, was founded in 1920 — the year of the panic[31]. A customer to whom Itochu had sold spinning machinery ran into trouble, and Chubei II took on the role of representative because there was no alternative[32]. The business was hard going, and continued at all only because senior spinners were asked for the loan of engineers[33]. The two companies merged in 1934[34].

In July 1929 Chubei II founded Kureha Spinning[35]. It was the year the Hamaguchi cabinet took office and anxiety over the lifting of the gold embargo was spreading, and he was advised by a number of his seniors to postpone[36]. He went ahead because of the experience gained at Toyama Spinning, and because he was confident in the innovative high-draft spinning process, not yet attempted in Japan[37]. Raw cotton was paid for with low-interest American money, through bills rolled over by the National City Bank, and the mills ran with the debt still on the books[38]. After the compulsory mergers imposed by the government as the war in China advanced, Kureha held 1.62 million spindles and 11,000 looms, 50 tonnes of rayon and staple fibre and three dyeing and bleaching plants — an operating scale second only to Toyobo[39].

Sanko and Daiken Sangyo under wartime consolidation, and the split into four companies

In September 1941 the old Itochu Shoji merged with Marubeni Shoten and the steel merchant Kishimoto Shoten to form Sanko Co., Ltd., with capital of ¥36 million[40]. Ito Takenosuke became chairman, Ito Chubei II president, and Kishimoto Hikoe (岸本彦衛) vice-president[41]. In September 1944, as the war situation grew critical, Sanko merged with the affiliated Kureha Spinning and Daido Boeki to establish Daiken Sangyo, with capital of just over ¥88 million[42]; in November of the same year capital was raised to just over ¥119 million[43].

Daiken Sangyo raised capital repeatedly — to just over ¥169 million in December 1948, just over ¥369 million in April 1949, and ¥400 million that June[44]. Beneath it stood Sanko Seishi, Sanko Senzai, Daiken Mokuzai, Daiken Hifuku, Fuji Oil, Kureha Rubber and Kureha Chemical, a fully diversified operating group[45]. At Kureha Aircraft, raised in Toyama Prefecture at the request of the Army Air Headquarters, army fighters were built under the guidance of Tachikawa Aircraft and Nakajima Aircraft[46].

In April 1949 Daiken Sangyo was designated under the Law for the Elimination of Excessive Concentration of Economic Power[47]. A corporate reconstruction and readjustment plan was approved that October, and in December three companies — Itochu Corporation, Marubeni and the Amagasaki Nail Works — were established as successor companies, joined by Kureha Spinning in March 1950, whereupon Daiken Sangyo was dissolved[48]. The re-founded Itochu Corporation had capital of ¥150 million, and Kosuge Uichiro (小菅宇一郎) became president[49]. In July 1950 its shares were listed on both the Osaka and Tokyo stock exchanges[50].

Growth after the restart, and the order to build up non-textiles

After the restart Itochu widened its business around the textile division, and did well through the Korean War. In April 1955 it took over the business of Taiyo Bussan, with which it had been closely tied in both capital and people. It rode out the reaction that followed the end of the war, and revenue rose sharply in the Jimmu boom of 1956 and the Iwato boom of 1959. Capital stood at $3.3M (¥1bn) in 1955, and Kosuge Uichiro served as president.

In May 1960 Echigo Masakazu (越後正一) succeeded Kosuge as the fifth president. He was fifty-nine. He first instituted a system of senior advisers, appointing Ito Chubei II and two other seniors to it. He then set organisational harmony and merit as the guiding principles, and made building up the non-textile divisions the most important objective of all. Bold reassignments of staff widened the heavy and chemical industries side, and the company moved abroad rapidly; by the year to March 1962 non-textile business accounted for more than half of turnover.

The money for that expansion was in every case secured just before a downturn. In July 1961, ahead of the credit squeeze that began that summer, the company doubled its capital in a single step into the ¥10bn class. In October it absorbed Morioka Kogyo, taking capital to $30.3M (¥11bn), and the merger with Aoki Shoji in April 1964 raised it to $45.6M (¥16bn). At the end of March 1964 it became the first Japanese trading house to issue a dollar-denominated convertible bond in Europe, obtaining $12.5 million of low-interest foreign money.

Toa Oil and IIAPCO: the gamble on an integrated oil chain

The decision to enter the oil industry in earnest was taken in May 1963. Itochu had already set up domestic oil sales companies, and led the trading houses in the number of affiliated filling stations. In the autumn of 1965 Yamashita Taro (山下太郎), then ill in bed, approached the company about taking over the Toa Oil shares he held. Toa Oil carried a vast accumulated deficit, and to make it a first-class refiner its capacity of 50,000 barrels would have to be expanded to at least about 200,000.

The heads of Showa Denko and Fuji Bank pressed Echigo on whether he was resolved to carry it through to the end whatever the sacrifice. After seeking the view of Ishizaka Taizo (石坂泰三) as well, the transfer from Yamashita bore fruit. Itochu sent in senior management to rebuild the company, expanded the Kawasaki works to 100,000 barrels, and built a new state-of-the-art 100,000-barrel plant at Chita. The Chita works was completed in the autumn of 1973.

The crude-oil development side began to move in March 1969, with a 稟議 proposal from the energy headquarters: to open negotiations with the parent company, Natomas, in order to acquire the concession of IIAPCO, which had struck oil in the Java Sea. The talks were difficult, and vice-president Tozaki Seiki (戸崎誠喜) spent a fortnight in San Francisco working on them. The outcome, signed on 22 January 1970, was the acquisition of 7 per cent of IIAPCO’s shares for $21 million, together with marketing rights over 40 per cent of the whole. Echigo later recalled that had the twenty-one million dollars ended up thrown into the sea, I was resolved to step down from the presidency on the spot (私の履歴書, My Personal History, Nihon Keizai Shimbun). The exploration came good, but refining and marketing were hit at once by failed tanker charters, excessive capital spending and low refinery utilisation, and by the end of 1984 had run up losses of about $421M (¥100bn). Itochu transferred control of Toa Oil in 1979 and withdrew from the oil business entirely in 1985.

The rescue merger with Ataka, brokered by Sumitomo Bank

Ataka & Co. stood ninth among the ten largest trading houses and yet, in 1975, failed in all but name. The cause was the vast sum sunk into a refinery built in Canada, which the first oil crisis turned against it. Total liabilities came to $3.3B (¥1tn), its banks numbered about 230 and its counterparties 35,000; it employed 3,600 people directly and, counting affiliates, 20,000. The Mainichi Shimbun broke the story on 7 December 1975, and by the 26th of that month there were fears of a default.

Sumitomo Bank judged that a collapse could be the trigger for a second Showa panic, and confirmed the outline in secret with the Ministry of Finance, the Bank of Japan and Kyowa Bank. It separated the Ataka problem from ordinary business and formed a special team under Isoda Ichiro (磯田一郎), then deputy president. The brokering of a merger began at the end of 1975 and reached a comprehensive business alliance with Itochu Corporation on 12 January 1976. The statement left the door open, saying that in future the two companies might well develop this into a merger.

At the press conference announcing the alliance, president Tozaki Seiki said: Given that the economic climate is not necessarily good we examined it carefully, but as both Sumitomo and Kyowa asked us strongly, we decided from a broad standpoint to co-operate in order to rescue Ataka from its difficulties (私の住友昭和史, My Showa Years at Sumitomo). The reason it did not proceed straight to a merger was that the more Itochu looked, the deeper Ataka’s wounds proved and the heavier the burden on Itochu itself. What Itochu took over were the steel, chemicals and non-ferrous trading books; the unprofitable divisions were cut away. The memorandum of merger was signed at the end of 1976 and the formal merger took effect in October 1977, bringing capital to $144.9M (¥37bn).

Property lending swollen in the bubble, and a thicket of subsidiaries

A new Tokyo head office building was completed in November 1980, and Itochu UK was established in February 1987; in this period the company widened its network. Swelling alongside it was investment and lending tied to property. In 1988 it bought the site of the former Australian embassy in Minato-ku, Tokyo for $499.5M (¥64bn), but the bubble burst before any development plan had been settled. The site was used for a time as company housing, and by the year to March 2004 its book value had been written down to around $55.5M (¥6bn). In April 1991 it absorbed Aoyama Jisho and in October 1992 Itochu Real Estate, bringing the property business inside the parent.

On the eastern shore of Lake Biwa there remained 30,000 tsubo of land that Echigo had acquired in 1968. In February 1993 Aoyama Kaihatsu was set up with $6.3M (¥700m) from Itochu and $2.7M (¥300m) from Tokyu Community, and the $179.9M (¥20bn) needed to buy the land was lent by an Itochu-affiliated non-bank. In the year to March 1994 Itochu fell to a consolidated loss of $137.9M (¥14bn), but booked $107.6M (¥11bn) of operating profit on the sale of the land to Aoyama Kaihatsu, keeping the parent company $19.6M (¥2bn) in the black. When Tokyu withdrew in September 1999, Itochu set aside $111.6M (¥13bn) of loan-loss provisions against its $184.5M (¥21bn) of lending to Aoyama Kaihatsu.

The number of subsidiaries swelled too, the consolidated total reaching 1,027 in the year to March 1999. That was more than Hitachi, generally taken to have the most; some 50 to 60 per cent of them were lossmaking, and the subsidiaries as a whole lost tens of billions of yen every year. By the year to March 1998 interest-bearing debt had swollen to $39.7B (¥5.2tn), and net losses ran from that year onward. In the autumn of 1998 the share price briefly fell below ¥200. Management stressed that its gross trading profit was the highest among the general trading houses, but measured by operating profit after expenses and interest that advantage vanished at once.

Niwa Uichiro’s ¥395bn write-off, taken in one blow

In the mid-1990s Niwa Uichiro (丹羽宇一郎), attending the deputy presidents’ meeting as general manager of the business division, argued for dealing with the bad assets early. I have spent a long time in the markets, so I hold it the iron rule of trading that when you sense danger you shut your eyes and cut half your position (Shukan Toyo Keizai, 20 May 2017), he said, and was overruled by deputy presidents of long experience. On becoming president in April 1998 he first set up a special investigation team of about seven people, and worked through what the assets actually contained by interviewing general managers and section heads. He assumed the reported figure for bad assets would come out smaller than the reality, and in the event the losses swelled to about three times the original estimate.

At six in the evening on 13 October 1999, Niwa told an emergency meeting of employees that the company would book extraordinary losses of $3.5B (¥395bn) on a parent basis and $2.2B (¥253bn) on a consolidated basis. Of that, $1.6B (¥183bn) related to property, the main items being a revision of the projected returns on ten golf-course projects and write-downs on twenty properties held for sale. On leased buildings and other fixed assets in use, impairment accounting replaced book value with market value, and $614.9M (¥70bn) was booked across twenty properties. Niwa told the meeting that if the reforms bear fruit, Itochu’s share price will be ¥1,200 by 2010 (Shukan Toyo Keizai, 13 Nov 1999); the closing price that day was ¥430.

A plan was drawn up to cut the subsidiaries to 700 by March 2001, and of the $834.5M (¥95bn) of losses at the 320 candidates for restructuring, $702.7M (¥80bn) was booked in the September interim results. The rule was that any company in the red three years running would be dealt with, whatever the reason. What paid for it was the gain on selling shares in Itochu Techno-Science, listed on the first section of the Tokyo Stock Exchange in December 1999. Consolidated shareholders’ equity had thinned to $2.0B (¥215bn) by the end of March 2000, but the following year to March 2001 turned a net profit of $580.2M (¥71bn). Niwa said he wanted to restore shareholders’ equity to $2.8B (¥300bn) as quickly as possible, and mentioned equity financing during the year to March 2001.

The non-resource shift, and a triple crown crowned by market value

In April 2010 Okafuji Masahiro (岡藤正広), a career textile man, became president. Itochu’s gross trading profit ranked second in the industry while the weight of expenses left net profit fourth — a perennial-fourth constitution that he set about remaking under the slogan ka-ke-fu, from the initials of 稼ぐ・削る・防ぐ (earn, cut, defend). He then set the attainable target of being number one in non-resources, to build a habit of winning inside the company, and introduced a morning-shift working pattern that banned late-night overtime in principle. In the year to March 2012 Itochu moved off fourth place. Okafuji was born in Osaka in 1949, graduated from the economics faculty of the University of Tokyo in 1974 and joined the company, spending his whole career in textile sales in Osaka.

In January 2015 Itochu announced that, through CTB, a joint venture funded equally with Thailand’s C.P. Group, it would acquire 20 per cent of the shares of CITIC Group of China. The investment was $5.7B (¥689bn), larger than the total Japanese companies had put into China the previous year. The original discussion had C.P. taking 6 per cent, but 20 per cent could not be given up if the stake was to be picked up in consolidated earnings, and Okafuji talked the two sides round to 10 per cent each. He described the negotiation as like pushing three of an elephant’s legs through the eye of a needle (Shukan Toyo Keizai, 13 Feb 2015). In the year to March 2019 Itochu booked an impairment loss of $1.3B (¥143bn), largely on the weakness of the CITIC shares.

In consumer-facing business, it acquired Dole’s packaged-foods business and its Asian fresh-produce business for about $1.4B (¥134bn) in April 2013. In 2018 it raised its stake in FamilyMart from about 41.5 per cent to 50.1 per cent, and after a tender offer beginning in July 2020 that company was delisted on 12 November. In January 2019 it launched an unsolicited tender offer for Descente; when it succeeded in March its holding rose to 40 per cent, and the management was replaced at the shareholders’ meeting in June. In June 2020 Itochu passed Mitsubishi Corporation in market value to stand first among the trading houses, and of its just under 300 consolidated subsidiaries and associates, 90 per cent had been profitable over the preceding three years.